A Palestinian businessman bidding to buy a failing Jewish housing estate in East Jerusalem is battling to fend off counter-bids from national religious groups determined to keep the project in Israeli hands.

Bashar al-Masri was "outed" by an Israeli newspaper last month as the preferred bidder to buy the debt of troubled Digal real estate. It runs the flagship Nof Zion estate in the heart of an Arab area.

Mr al-Masri plans to sell the remaining 300 housing units to Palestinians, to circumvent cumbersome regulations that make it nearly impossible for them to win approval to build new homes in Jerusalem. But since his name was made public, those plans have been thrown into jeopardy. Several Israeli investors have scrambled to prepare bids to ensure the development remains exclusively Jewish.

Palestinians fear an expanding Jewish presence could predetermine the fate of East Jerusalem, which they want as the capital of their future state.

If Mr al-Masri's bid was successful, it would mark a rare victory for the Palestinians, who have seen their grip in the eastern sector eroded through a growing Jewish presence.

The expansion of Jewish settlements – which are illegal under international law – remains one of the biggest stumbling blocks to the revival of direct peace talks.

Opponents of the deal have joined a vocal campaign against the Palestinian businessman, accusing him of attempting to conceal his ownership by hiding behind a Cyprus-based company and linking him to terrorism.

Mr al-Masri has hit back, insisting that his interest in the project is commercial, not political.

"I'm appalled by the reaction," the businessman told The Independent. "All these accusations are campaigns to smear my name.

"I am interested in the real estate market I know best. This property is in the heart of a Palestinian area. They bought it commercially and we're trying to back it commercially."

Mr al-Masri has reportedly offered to pay 80 per cent of the developer's debt of $17m (£10.9m), the Wall Street Journal reported. Digal is also said to owe $20m to Bank Leumi.

The bid initially seemed to be secure, but after Mr al-Masri's identity was revealed, Bank Leumi informed him they were reconsidering the bid in light of new offers, the businessman claimed.